World Development RepOrt1994 T 1I - IFRASTRUCTURE FOR DEVELOPMENT World Development Report 1994 Infrastructure for Development Published for the World Bank Oxford University Press Oxford University Press OXFORD NEW YORK TORONTO DELHI BOMBAY CALCUTTA MADRAS KARACHI KUALA LUMPUR SINGAPORE HONG KONG TOKYO NAIROBI DAR ES SALAAM CAPE TOWN MELBOURNE AUCKLAND and associated companies in BERLIN IBADAN © 1994 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. Published by Oxford University Press, Inc. 200 Madison Avenue, New York, N.Y. 10016 Oxford is a registered trademark of Oxford University Press. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Manufactured in the United States of America First printing June 1994 Photographs: Maurice Asseo, 73; Doug Barnes, 13; Curt Carnemark, 37, 52, 89, 109. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. ISBN 0-19-520991-5 clot hbound ISBN 0-19-520992-3 paperback ISSN 0163-5085 S 'I, Text printed on recycled paper that conforms to the American National Standard for Permanence of Paper for Printed Library Material, Z39.48-1984 Foreword World Development Report 1994, the seventeenth in eration, and maintenance of infrastructure is also this annual series, examines the link between infra- key to better performance, particularly in areas structure and development and explores ways in where competition is constrained. which developing countries can improve both the Several trends are helping to improve the perfor- provision and the quality of infrastructure services. mance of infrastructure. First, innovation in tech- Like the health and environment topics of the two nology and in the regulatory management of mar- previous reports in this series, infrastructure is an kets makes more diversity possible in the supply of area in which government policy and finance have services. Second, an evaluation of the role of gov- an important role to play because of its pervasive ernment is leading to a shift from direct govern- impact on economic development and human wel- ment provision of services to increasing private sec- fare. tor provisionand recent experience in many In recent decades, developing countries have countries with public-private partnerships is high- made substantial investments in infrastructure, lighting new ways to increase efficiency and ex- achieving dramatic gains for households and pro- pand services. Third, increased concern about social ducers by expanding their access to services such as and environmental sustainability has heightened safe water, sanitation, electric power, telecommuni- public interest in infrastructure design and perfor- cations, and transport. Even more infrastructure in- mance. vestment and expansion are needed in order to ex- Differences between and within infrastructure tend the reach of servicesespecially to people sectors, together with major variations in country living in rural areas and to the poor. needs and capacities, mean that the detailed design But as this report shows, the quantity of invest- and implementation of policy reform must be tai- ment cannot be the exclusive focus of policy. Im- lored to specific cases. But there is no question that proving the quality of infrastructure service also is the overall benefits from improving infrastructure vital. Low operating efficiency, inadequate mainte- are large. Roughly $200 billion is invested in the sec- nance, and lack of attention to the needs of users tor annually in the developing world, and the sav- have all played a part in reducing the development ings that would accrue from better provision and impact of infrastructure investments in the past. performance would be substantial. More efficient, Both quantity and quality improvements are essen- more accessible, and less costly infrastructure ser- tial to modernize and diversify production, help vices are also, of course, essential to more effective countries compete internationally, and accommo- poverty reduction. date rapid urbanization. Future success means As in the past, World Development Report 1994 in- building on lessons learned. cludes the World Development Indicators, which The report identifies the basic cause of poor past offer selected social and economic statistics for 132 performance as inadequate institutional incentives countries. The Report is a study by the Bank's staff, for improving the provision of infrastructure. To pro- and the judgments made herein do not necessarily mote more efficient and responsive service delivery, reflect the views of the Board of Directors or of the incentives need to be changed through commercial governments they represent. management, competition, and user involvement. Commercial management including financial au- tonomy, accountability, and well-defined objec- tivesfocuses providers of infrastructure services on increasing efficiency and meeting customer de- mand. Competition provides users with choices that Lewis T. Preston can better meet their needs and compels providers President to become more efficient and accountable. Involve- The World Bank ment of users and other stakeholders in the design, op- May 31, 1994 111 This Report has been prepared by a team led by Gregory K. Ingram and comprising John Besant-Jones, Antonio Estache, Christine Kessides, Peter Lanjouw, Ashoka Mody, and Lant Pritchett. Valuable contri- butions and advice were provided by Esra Bennathan, Koji Kashiwaya, Miguel Kiguel, Lyn Squire, and Paulo Vieira Da Cunha. Assisting the team were Ritu Basu, Leslie Citroen, Marianne Fay, Christine Kerr, Kavita Mathur, Dambisa Moyo, and Sarbajit Sinha. The work was carried out under the general direction of Michael Bruno. Many others inside and outside the Bank provided helpful comments and contributions (see the Bibliographical note). The International Economics Department contributed to the data appendix and was responsible for the World Development Indicators. The production staff for the Report included Ann Beasley, Kathryn Kline Dahi, Stephanie Gerard, Audrey K. Heiligman, Cathe Kocak, Jeffrey N. Lecksell, Nancy Levine, Deirdre T. Murphy, Hugh Nees, Kathy Rosen, Walton Rosenquist, David Theis, and Michael Treadway. The support staff was headed by Rhoda Blade-Charest and then Rebecca Sugui and included Laitan Alli, Michael Geller, and Paul Holtz. Bruce Ross-Larson provided editorial advice and assistance. Trinidad S. Angeles served as administrative assistant. Anthony Rowley was the principal editor. Preparation of the Report was greatly aided by background papers and by contributions from par- ticipants in consultation meetings, both of which were supported in part by the Policy and Human Re- sources Development Fund financed by the Japanese government. The names of participants in the consultation meetings are listed in the Bibliographical note. iv Contents Definitions and data notes ix Overview I Infrastructure's role and record 2 Diagnosing the causes of poor performance 6 New opportunities and initiatives 7 Options for the future 8 Implementing reform 10 Potential payoffs from reform 11 1 Infrastructure: achievements, challenges, and opportunities 13 Infrastructure's impact on development 14 Origins of the public sector role in infrastructure 22 The record of performance 25 Diagnosis and directions for change 32 2Running public entities on commercial principles 37 Lessons of success and failure 38 Corporatization 40 Focused goals and accountable management 41 Pricing for financial independence 47 The need for a political commitment to reform 51 3 Using markets in infrastructure provision 52 Unbundling services for competition 53 The range of market alternatives 55 Paths to market provision 64 Conclusion 71 4 Beyond markets in infrastructure 73 Decentralization and participation: involving users 73 Improving budgetary allocations 79 Subsidies and transfers to the poor 80 Addressing externalities 82 Elements of infrastructure planning 84 Conclusion 88 5Financing needed investments 89 Old ways of financing infrastructureand new 89 The spread of project financing: achievements and lessons 93 Institutions and instruments for resource mobilization 102 Prospects 108 V 6 Setting priorities and implementing reform 109 Choosing among alternatives: institutional options and country conditions 109 Sectoral agendas for reform 114 Payoffs from reform 121 Bibliographical note 123 Appendix: Infrastructure data 139 World Development Indicators 151 Boxes 1 What is infrastructure? 2 2 Main messages of World Development Report 1994 2 1.1 Returns on infrastructure investment- too good to be true? 15 1.2 The importance of infrastructure to economic development: an example from China 18 1.3 Throwing infrastructure overboard 19 1.4 Infrastructure's direct and indirect effects in rural India 21 1.5 Households' responses to unreliability of water supply 30 1.6 Public failures raise private costs 30 1.7 Infrastructure activities threaten the Black Sea environment 34 2.1 The right way to run a public utility: a look at Botswana's Water Utility Corporation 38 2.2 Severance pay eases layoffs in Argentina Railways 40 2.3